Economic slowdown making angels fear to tread

Arduous journey: Helion Venture’s Ashish Gupta says angel investment will be more of an exception this year owing to the financial crunch. Madhu Kapparath / Mint

Updated: Tue, Mar 03 2009. 10 31 AM IST

Bangalore / Mumbai: In the risk capital business, some backers are called angel investors for a reason. They operate mostly on trust, invest with not too many questions asked, and write out cheques to early stage start-up companies come high tide or low.

Arduous journey: Helion Venture’s Ashish Gupta says angel investment will be more of an exception this year owing to the financial crunch. Madhu Kapparath / Mint

But in the current environment of recession in the world’s largest economies—in the US, some economists have called the recession the worst since the Great Depression that stretched for years from 1929—even such angel investors are shying away from making investments, joining venture capital and private equity firms, who typically invest at later stages in a company’s life, on the sidelines.

Angel investors, also known as angels, are people (professional venture capital heads, corporate chief executives and high networth individuals) who invest their own capital—mostly Rs20 lakh to Rs1 crore—in firms that are at an embryonic stage. In India, such investments are tiny—estimated at less than $200 million (Rs1,040 crore) in three years—but still represent a source of capital for start-ups.

“Definitely angel investing will be impacted as portfolio companies of investors have been impacted and some have got losses of as much as 70%. There is much lesser money to be invested,” said Rajesh Jain, managing director of Netcore Solutions Pvt. Ltd.

Mumbai-based Jain has invested in 13 firms in the last three-four years. He hit the headlines in 1999 after his Web portal IndiaWorld Communications was acquired by Sify Ltd (then called Satyam Infoway) for Rs499 crore, one of the biggest Internet deals in the country.

A general sense of pessimism has angels holding on to cash now, say others.

“We’re still evaluating a lot of business plans and if we find them compelling, (we) will invest. But there’s limited funds to invest now,” said Shantanu Surpure, managing advocate at Sand Hill India Advisors, a law firm. He has personally put money in three companies that were backed by investors part of a group called Mumbai Angels. But that was before the downturn. Since May, Mumbai Angels, which had 10 deals on its roster from November 2006 until May last year, has done just one transaction.

Angel investors and high networth individuals, who also deploy their investible surplus on the stock markets, now have alternative opportunities in public equity markets, whose valuation in India has halved since January 2008.

“Opportunities in blue-chip companies these days are much brighter than it is in early stage start-ups,” said Sasha Mirchandani, senior investment director (India) at BlueRun Ventures, an early stage fund that’s largely funded by Finland’s Nokia Oyj, explaining how angels see the changed risk-reward scenario. He is also a member of Mumbai Angels.

“Angel investments would be more of an exception (this year)... People are feeling poor,” said Ashish Gupta, managing director at Helion Venture Partners Llc. Also a prominent angel investor, Gupta has invested in 35 firms in 10 years. Some of his prominent exits include Daksh eServices Pvt. Ltd that was taken over by International Business Machines Corp. in 2004; Obongo (acquired by AOL Llc.) and Kaboodle (bought by Hearst Corp.).

Experts say difficulties of early-stage companies in getting first round of venture capital funding will further dampen angel investing. The Indian Angel Network (IAN), the country’s biggest angel network, is coming to terms with the difficulties faced by angel-backed firms, particularly those scouting for follow-on funding.

“IAN is trying to come up with a fund to invest in follow-on investments. It should come up in the next six months,” said Rohit Chand, a member of IAN. According to Chand, the follow-on investment fund will have the same group of investors as IAN, though a few other partners will also join in. He declined to give details such as the corpus of the fund.

In strenuous times, terms also get tighter. “We are now looking at ideas that are mature and have got some customer traction. At least one customer is needed,” said Joe Fernandes, an IAN member.

Also, unlike earlier, angels have an investment approach that now includes providing infusion of capital on the basis of milestones reached by the company. It’s also taking longer to raise funding from these investors. Just about a year back, it would take a firm two months to get funding; now it takes up to double that time.

The downturn has also dampened the spirits of aspiring angel investors. One of them is Mohanjit Jolly, executive director at Draper Fisher Jurvetson, India, who says he was planning to invest in a few companies this year, but for the liquidity crunch. “I am seeing some very interesting plans… I wish I was in a position to invest in the capacity of an angel investor.”